No one can tell you exactly when this market is going to bottom. It could have done so already, or we could have another 10 percent decline ahead of us. What to do?
From a fundamental point of view nothing has changed. The Fed is still hell bent on combatting inflation and if there is fallout in the stock market as a result, well, investors will need to suck it up.
Inflation may have peaked, but that means little to consumers. The damage has already been done and accumulated inflation will take a long time to come down. Investors worry that consumers will spend less, and companies will make less as well.
This week, those fears were partially borne out. Retail companies released earnings, and some (like Walmart, Ross Stores and Target) were disappointing, largely due to a hit to their profits as a result of higher costs and stagnant inventories. The entire retail sector, as well as many consumers durable companies saw their stocks plummet as a result.
To me, this is another sign that the bears are methodically gnawing through those sectors that have withstood the market’s decline thus far. Remember that last week, I mentioned the bears were chasing the “Generals” around the cave, and now the safety trades are getting clobbered. This is what happens as a bear market matures.
On the geopolitical front, there has been no change in the Chinese COVID lockdown, or the subsequent supply chain delays that have been exacerbated as a result. That impacts global growth as does the ongoing war in Ukraine. With so many unknowns, is it any wonder that finding a bottom is an elusive exercise?
But when I talk about bottoms, the time frame (short, medium, or long-term) becomes important. For some, who are fully invested, and are long-term investors, I advise you to do nothing. Long-term holders have already suffered through a 20 percent decline in the S&P 500 Index. In the NASDAQ markets, the decline is approaching 30 percent. From my reckoning, therefore, we are already halfway to two-thirds of the way to the bottom.
As for traders with some cash and who are concerned with the next quarter or two, I am negative on the stock market overall, at least into the autumn 2022 (medium-term), but between now and then (short-term) we can see some substantial rallies ahead of us.
For example, last week I flagged readers that I was expecting a relief rally. In three days, the S&P 500 Index gained almost 6 percent. That’s not chump change. Of course, you had to be quick, since we subsequently gave back all those gains back over the course of the end of the week and finished at new lows for the year, so now what?
For those short timers, who remained in the market (in May 2022) to “play,” as opposed to “selling in May and going away,” recall that I have been expecting a sloppy “W” pattern in the markets this month. We are navigating the middle of the W as we make a new low. This should conclude in the next week or two, and then hopefully up again.